Irregular Payments

New here and like what you read? Subscribe to my RSS feed for more. And thanks for visiting!

One of those little factoids I picked up from my read-through of The Automatic Millionaire was the idea of paying yourself first, even, and especially, before the taxman.

This one should be so obvious, especially for someone working in tax preparation - I can find all the deductions in the world for my clients, but am apparently blind to those for myself! - but I had barely considered the fact that this year I can defer up to $10,000 of my salary pre-tax into my SIMPLE-IRA. It would take (assuming I did the math correctly, which I believe I did) the equivalent of approximately $12,750 of my salary in post-tax dollars (including FICA/State/Fed taxes) to put that same $10,000 into my ROTH. And with a $4,000 contribution limit for the ROTH, I couldn’t match it if I wanted, even if I maxed out both mine & the wife’s.

And that’s all before a tax credit/deduction or two for that investing. By my very off the cuff calculations, with our income staying in the 15% federal tax bracket and unable to bump us down to the 20% Retirement Savings Credit level without some, errr, creative accounting,

• $10,000 into my SIMPLE-IRA & $4,000 into my Wife’s Traditional IRA would give us $2,500 in federal tax savings (15% of $14,000 + $400 in Retirement Savings Contribution credit)
• $10,000 into my SIMPLE gives us $1,700 in Federal (15% of $10,000 + $200 in RSC credit)
• $8,000 into two Traditional IRAs would give us $1,600 in Federal (15% of $8,000 + $400 in RSC credit)
• $8,000 into two ROTH IRAs would give us $400 in Federal ($400 in RSC credit); of course, the advantage of the ROTH is that withdrawals are tax-free, but it appears we’re taking on a bit of a load upfront, doesn’t it?

And that’s just federal tax reductions; the effect on state taxes/FICA hasn’t been included, which would certainly be more than a nickel or two. [I'm just being lazy - if you care to do the math, FICA's 7.65% and my marginal state tax rate is 5.12%.]

[Let's not even consider the 3% employer match with the SIMPLE, or I'll look even stupider for considering that ROTH... Tax free withdrawals notwithstanding, a lot of upfront lifting is showing up with the ROTH!]

Of course, until those credit cards are notched down into something a little more manageable, I can’t imagine investing the max, at least right now. Nevertheless, methinks I’ve got a little research to do!